Chaos: PMs, Budgets and Market Instability – Ella Brittan, Tiffin School

The UK economy seems in dire straits, with demoralising political and economic records being broken almost every second. We are all experiencing the ever-tightening budget constraints the volatile market is having on us. So, how bad is the economy really? Is there some light at the end of this monotonous, perpetual tunnel?

Let’s begin with 23 September: the infamous Kwasi Kwarteng’s Mini-Budget. This zealous outlook of trickle-down, growth economics and an unfunded £45bn worth of tax cuts shook the already fluctuating markets devastating the exchange rate, £1 was equal to $1.07 on 27 September compared to $1.37, which was the years highest exchange rate.

Furthermore, the government bond yield increased to a high of 4.9%, which has not been seen since the 2008 Global Financial Crash. Government bonds (GILTS) are loans from bondholders to the government to help fund government spending. These are usually more stable than the stock market; however, due to a lack of market confidence about the UK economy, the yield rose making borrowing more expensive for the government, who now must spend more to borrow a fixed amount of money.

On top of this, we are currently going through a cost-of-living crisis, as you probably already know. One culprit of this crisis is the supply issues many businesses face due to not only Russia’s invasion of Ukraine, which has led to an uncertainty of corn, wheat and barley exports, but also the Covid pandemic and the shutting down of many factories, which caused a shortage of items when Covid restrictions finally eased, and economies began to bounce back. So, with this low supply, prices have been forced to increase in hopes of rationing any demand. This increased price has seen the inflation rates soar to a current, staggering 10.1%, according to the Bank of England. Further to this, sharp price rises in oil and gas, which was made worse with Russia’s invasion of Ukraine, has contributed to these record-breaking statistics.

To pile on more despair, these skyrocketing prices have led to the increase of interest rate to 3% as of 3 November and the Bank of England has warned that this could rise further. Although, the intentions of rising interest rates are in favour of the economy’s future as the high borrowing costs in theory will help lower demand and tame inflation; it is hard to see the positives when we continue to get battered with spiralling costs.

This all seems like a perfect storm. Though, could it be worse? Is there a way out?

It may be difficult to look beyond the economic agony but valiant efforts to try and control the markets and the somewhat stabilising political turmoil may be steering us clear from an even more dire future.

Firstly, the Bank of England, who may seem like the enemy as they cruelly raise interest rates and supress our ability to borrow and spend, swooped in almost heroically with unprecedented actions to purchase £65bn worth of government bonds over the course of 13 days – from 27 September to 10 October. Its hopes were to calm the spooked market and prevent a mass selling of bonds and a collapse in the pension market. This was the saving grace for pensions as since 27 September government bond yield is on average on a downward trend and currently is around 3%. Thanks to the Bank of England, the country’s retirement futures seem at least stable for now.

Moreover, the week of October 25 brought about our 3rd and hopefully final – at least for the next few years – Prime Minister in three months. As Rishi Sunak became our new PM his cabinet underwent a shake-up allowing the UK government to have a fresh start. Even though they are only a few weeks in, the markets remain calm. However, time will tell and the Autumn Statement on the 15th November will hopefully be a harbinger of stability for UK’s economic future. Although, with  £50bn worth of savings to find to fill the country’s fiscal black hole admitted by Jeremey Hunt (Chancellor of the Exchequer), difficult decisions will have to be made, which most certainly won’t please everyone.

Overall, the cost-of-living crisis is a monstruous and complex topic with so many factors making it a difficult issue to fully comprehend, let alone solve. Furthermore, the Bank of England recently released the depressing news that the UK is likely to enter a 2-year recession (the longest since records began), which will likely cause the unemployment rate to increase to 6.5%, which is double the current rate. It looks like there is a harsh, gloomy few years ahead but these are only predictions, so it is hard to truly state what the future has to hold.